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Portfolio A consists of a 2-year zero-coupon bond with a face value of $8,000 and a...

Portfolio A consists of a 2-year zero-coupon bond with a face value of $8,000 and a 10-year zero-coupon bond with a face value of $2,000. The current yield on all bonds is 11.75% per annum. (Answer with two decimal digits accuracy)

The duration of portfolio A is

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Expert Solution

Solution:
Bond Maturity Yeild Mac.
Duration
Present Value Factor
(n years ,Yeild)
Par value Market Value Weights
2 year bond 2 11.75% 2.00 0.801 $    8,000 $              6,408 0.91
10 year bond 10 11.75% 10.00 0.329 $    2,000 $                 658 0.09
$              7,066
Duration of portfolio = W1D1+W2D2+…......WnDn
Where
W = Weight of bond
D = Duration of bond
n = number of bonds in port folio
= 0.91*2+0.09*10
= 2.72 years

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